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Still rich pickings for the risk averse

M&A among smaller firms is still an attractive investment in the richer economies

IN MOST resource rich countries, the role of the state has been the dominant theme of the biggest deals in the energy sector. But it is not the only factor at play, especially further down the food chain.

One of the most creative transactions saw Addax Petroleum buy PanOcean Energy last autumn for C$1.6bn ($1.4bn). The deal generated significant value for the Addax. But it is also indicative of a healthy level of deal-making beneath the radar of the sector's major players. Gabon, where Addax took control of PanOcean's prize assets, may not offer significant upside to the majors, but is an attractive play to smaller companies (see p16).

Many of these opportunities are to be had in the relatively stable operating environment of North America. Anadarko saw sufficient upside to build a big position in US gas last summer when it bought Kerr-McGee for $19.6bn and Western Gas Resources for $4.1bn. To raise some of the money for that acquisition, Anadarko put its Canadian unit on the market. Canadian Natural Resources bought it, for just over $4bn – a deal considered to be one of the few under-priced transactions of the past year.

Interest in US gas prospects was part of a wider trend towards gas throughout the sector's M&A activity of the past year, says John S Herold. While four of the five top deals were "gas-weighted", over 50% of the reserves acquired, including many of the smaller transactions, were gas.

And many of the same worries that are affecting the majors also affected the thinking of the independents. Higher oil prices, increased geopolitical risks and technological advances, says PricewaterhouseCoopers (PWC), have all left mid-cap firms eager to minimise risk while at the same time able to deploy technology to add value. Deals in Canada's oil sands and those connected with coal-seam gas in Australia and the US, for example, accounted for $14bn of the total $291bn. Compared with Russia or Venezuela, political risk in the North American upstream is virtually non-existent, making it particularly attractive to smaller players.

Also contributing to the increase in M&A activity is the growing involvement of private-equity firms. "That's been one of the main factors affecting activity in the US this year," says Bruce Bilger, partner at law firm Vinson & Elkins. The most notable transaction of this kind involved Kinder Morgan, one of the US' largest pipeline and storage operators. Together with Goldman Sachs and other private-equity investors, a management-led buy-out of the firm suggests there could be more value to be had as a privately owned firm than as a listed entity.

PWC says that amid the "pressure to replace reserves" consolidation has "a long way to run in the independent and medium-size sector of the market, particularly in North America". But the rise of the national oil companies (NOCs) will be the greatest driver. The appetites of China's CNOOC and Gazprom, among others, show little sign of satiety. Chinese firms in particular are likely to become "truly global players", says Graham Sword, head of oil and gas at 3i, a venture-capital firm. "The pace at which it happens could be dramatic. Some IOCs will have to reposition themselves to develop a new relationship with NOCs."

That might not be good news for anyone who liked the way the oil and gas industry had settled over the last two decades, with power in the hands of the majors. But it should bring happy days to anyone willing to co-operate with the new masters.

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